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KKR Pumps $1.2 Billion Into Struggling Payment Processor First Data; Firm Has Been in the Red Since Its $26 Billion Leveraged Buyout in 2007

KKR Pumps $1.2 Billion Into Struggling Payment Processor First Data

Firm Has Been in the Red Since Its $26 Billion Leveraged Buyout in 2007

MIKE SPECTOR and ROBIN SIDEL

June 19, 2014 12:34 p.m. ET

KKR KKR +0.04% & Co. pumped $1.2 billion into First Data Corp., an unusual move showing that its debt-fueled takeover of the payment processor seven years ago remains a burden for the buyout firm.

Credit-card processor First Data has been in the red since KKR took it over in 2007 for roughly $26 billion in one of the largest-ever private-equity buyouts. For a while, KKR refinanced First Data’s hefty debt load to ease pressure on the company. Now, it is injecting equity as part of a $3.5 billion investment that includes $2 billion from pension funds, mutual funds, asset managers and wealthy individuals, KKR said Thursday. The total investment, among the largest of its kind, gives First Data a boost as it tries to rebound from previous losses and reshape its business.

KKR will invest $500 million from its fund that did the original buyout and another $700 million from its own cash, or balance sheet, the firm said.

Private-equity firms rarely put additional cash into a company they have bought years after closing the deal. Instead, these firms—which buy companies largely with borrowed money—often pay themselves by having the company borrow more money. Owners eventually try to sell companies or take them public. In the past couple of years, with stocks on the rise, conditions have been ripe for private-equity firms to sell out of investments they have held for years, including some stragglers.

But KKR hasn’t been able to shed Atlanta-based First Data, which was weighed down by an outsize debt load taken on in the takeover. Thursday’s deal gives First Data, which employs about 23,000 people and processes credit-card and debit-card payments for merchants and banks, additional cash to reduce by $375 million its annual interest payments on debt, KKR said.

First Data in the past several years paid just under $2 billion in annual interest expenses, and more than $600 million alone in the first three months of 2014. The company has failed to post an annual profit since 2007, and cycled through five chief executives since 2010. First Data this year took the unusual step of suspending 401(k) contributions to employees and replacing cash bonuses with stock.

The company’s losses have narrowed of late, with certain earnings measures improving by wide margins. Still, continuing struggles have prevented KKR from taking First Data public or exploring an outright sale to cash out on the original deal.

First Data “muddled through” the recession and “performed OK,” said John Rogers, a Moody’s Investors Service analyst. KKR is “obviously doing something to get it on better footing so they can exit,” he said.

The cash infusion is “a de-levering story” in addition to “validation” of the company’s current growth prospects, said First Data Chief Executive Frank Bisignano, referring to the ability to reduce leverage, or debt, with the new cash. Investors have “made the final verdict,” he said, through an investment of “no-strings-attached equity.”

Mr. Bisignano left a top role at J.P. Morgan Chase & Co. last year to take the reins at First Data, and started pushing new products to extend the company’s reach beyond electronic payment processing. First Data earlier this week introduced cloud-based software aimed at helping small and medium-size businesses monitor operations and sales. Mr. Bisignano also hired a number of new executives, including some from J.P. Morgan.

For KKR, the investment buys additional time to try and eke out profits on one of many debt-heavy deals the private-equity industry binged on before the financial crisis, often with subpar results. The record $32 billion takeover in 2007 of Texas power company TXU—now known as Energy Future Holdings Corp.—by KKR, TPG and Goldman Sachs Group Inc.’s buyout arm tumbled into bankruptcy protection in April.

Other deals, such as Caesars Entertainment Corp., have struggled but avoided disaster through various financial transactions. Yet others navigated the recession and at least eventually performed well, such as Hilton Worldwide Holdings Inc.

Still, many deals hurt lenders and bondholders along the way. Overall, a group of 10 private-equity-backed megadeals preceding the crisis with more than $10 billion in debt defaulted at an average annual rate of 17.8%, compared with 6.4% for a benchmark portfolio of U.S. companies with weak credit ratings, according to a recent Moody’s report.

First Data struggled during the recession as cash-strapped consumers reined in spending and stiff competition emerged from rivals such as Vantiv LLC and upstart Square. The company has lost money each year since 2008, in some cases reporting losses exceeding $1 billion.

KKR currently marks its investment in First Data at 80 cents on the dollar.

Still, KKR’s mark has improved alongside the company’s narrowing losses. First Data’s earnings before interest, taxes, depreciation and amortization in 2013 was just shy of $2.5 billion. The company previously told lenders it needed to achieve Ebidta of around $3 billion to attract a healthy value that would pave the way for an initial public stock offering. The company, after rearranging finances, doesn’t face significant due dates on debt until 2016.

“What we want to do right now is just grow the business,” said KKR co-founderHenry Kravis, adding that welcoming market conditions for selling off investments is “not what’s driving us here.”

 

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About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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